Bridging loan exit

BTL underwriting changes could prevent bridging exits




The threat of borrowers being locked out of the market in the wake of changes to buy-to-let (BTL) underwriting standards is real, an industry expert has warned.

Last week, Mike Strange, managing director of Funding 365, suggested that the Prudential Regulation Authority’s (PRA) new BTL stress test of 125% coverage at 5.5% interest per month could prevent some customers from being able to exit a bridging loan.

Now, Benson Hersch, CEO of the Association of Short Term Lenders, has echoed these concerns, claiming that borrowers may instead risk turning to firms that are not regulated by the PRA.

“The threat is real,” Benson stated.

“In some extreme cases, borrowers may have to look to long-term lenders which are not subject to PRA regulation.

“This would definitely be a backward step, with a negative outcome for borrowers.”

Although loans with a term of up to 12 months are exempt from the new affordability criteria, Benson admitted that in some cases lenders may have to consider changing their offerings.

“A key element in the underwriting of bridging loans is evaluation of the exit strategy.

“…Where the exit is a refinance, lenders will have to bear the new rules in mind when setting LTVs.”

'No one wishes to see a spike in litigation and possessions'

Last month, BTL commenters revealed that the PRA’s changes could turn some landlords into mortgage prisoners due to their inability to refinance.

Like Benson, Ian Broadbent, director at Holme Finance Bridging Solutions, cautioned that lenders would now have to take particular care when issuing finance or risk harming both themselves and their clients.

“Once again, ill-thought-out government policy has a disproportionate effect on those simply trying to add a little security to their future.

“As bridging lenders, we all want to retain profitable business models and good client relationships.

“No one wishes to see a spike in litigation and possessions, therefore, the application of the new rules has to be carefully considered when advancing that bridging loan.”

Mortgage prisoners
Some landlords could become mortgage prisoners under the new affordability rules

'It is necessary for us in the bridging finance world to be cautious'

Although Steve Olejnik, chief operating officer at Mortgages for Business, agreed that a number of borrowers may struggle to refinance, he insisted that many lenders were prepared for this threat.

“There may be a few borrowers out there who took out a bridging loan a year ago, with a view to exiting on to a buy-to-let mortgage, that might be finding it difficult to refinance because the facility was agreed before the PRA proposals were published last March.

“In our experience, however, this is not the case.

“The bridging providers we work with are lending responsibly and certainly taking into account the new rules for personal borrowers.”


Brokers may turn to lenders who take into account the new rules for personal borrowers

Ben Wilson, head of Enness Bridging Finance, also stressed the importance of working with lenders who perform thorough underwriting.

“While this might appear to be only a buy-to-let issue, it is necessary for us in the bridging finance world to be cautious as well, and advise our clients accurately. 

“If acquiring a mortgage is more difficult as a result of the changes, securing a bridging loan in the first place may also become more of a challenge.

“However, for brokers such as us who work with such a diverse panel of lenders, we will be able to work with one who can take the client’s entire financial situation into account.”

Meanwhile, Gary Bailey, sales director at Together, emphasised that not all bridging customers who turn to BTL finance would be affected by the changes.

“We anticipate that the PRA’s new affordability checks for buy-to-let will have an impact on some consumers’ ability to refinance, and therefore could prevent some borrowers exiting bridging loans.

“However, those who purchase property using a limited company are unlikely to suffer from the change in interest coverage ratio.”

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